In this month's issue:
The Yen Has a Lot To Carry
Mark Luschini, Chief Investment Strategist
The yen “carry trade” is a well-known strategy in which investors borrow money in the Japanese currency (the “yen”) and use the proceeds to purchase assets such as stocks and bonds generally traded in other countries. The cost of “carry” is the interest rate applied to the borrower, which is predicated upon the prevailing rate structure in Japan. Historically speaking, Japanese bond yields from shortto long-term maturities have been much lower than most other developed markets primarily due to the endemic deflation Japan faced for almost 20 years.
This has led many global investors to pursue a strategy whereby they borrow from Japan and invest in bonds issued by countries and companies that offer a better yield, earning the spread between the two as long as that investor can hedge the currency effects cheaply enough to justify the trade. Since the yen has been losing value for the better part of the last 30 years, on most occasions that trade has been lucrative. However, investors did not limit using the carry trade to buying bonds.
Anatomy of a Rate Hike Cycle
Guy LeBas, Chief Fixed Income Strategist
It has been a few years since the U.S. bond markets had to contend with a rate-hike cycle, but that last one was memorable. Beginning in March 2022, the Federal Reserve (Fed) raised short-term interest rates from effectively zero to 5.25%–5.50% by July 2023, a total increase of 5.25% in just sixteen months. Four consecutive 0.75% hikes in mid- 2022 made that cycle especially aggressive by historical standards. While Fed policymakers have embarked on another cycle in 2026, this time around should be night and day compared with the last one.
In 2022, the urgent hikes were driven by inflation. The consumer price index (CPI) peaked at a 9.1% annual rate in June 2022, the highest in four decades, as pandemicrelated supply disruptions, strong consumer demand, and sharply higher food and energy prices collided. For the bond markets, the speed at which investors had to adjust their expectations meant that even high-quality bonds suffered unusually large price declines. Based on one spectacular study, bond market returns of -13% in 2022 were the worst since Washington’s time in office (yes, there was only one President Washington).
Spring Forward but Not Fall Back
Gregory M. Drahuschak, Market Strategist
For anyone who struggles to remember seasonal clock changes, the phrase “spring forward and fall back” is a helpful reminder. This year, however, the stock market is not poised to fall back.
For much of September 2026, the S&P 500 bucked its typically negative result for the month, but it still ended the month with a 0.45% loss, as investors were reminded of October’s undeservedly bad reputation.
October stock market concerns stem from major historical lows set during the month. No October was worse for investors than October 1987, when a confusing series of events triggered extreme volatility. Leading up to the crash, stocks had tripled in value between August 1982 and August 1987, with the Dow Jones Industrial Average gaining 44% in the first seven months of 1987 alone. However, several factors quickly derailed the market: excessive valuations sparked asset bubble fears, the Federal Reserve raised interest rates, a widening U.S. trade deficit pressured the dollar, and U.S. military strikes on Iranian oil platforms fueled geopolitical anxiety. Following the historic selloff, it took until August 1989 for the S&P 500 to fully recover to its previous peak.
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